EXPORT FINANCING

PRE-SHIPMENT & POST-SHIPMENT FINANCE

By HAMMAD MOHAMMED

PRE-SHIPMENT FINANCE - DEFINITION & OBJECTIVES

The assistance provided to the exporter before shipment of goods is known as pre-shipment finance." It is provided for working capital needs to: The purchase of raw material Processing Packing Transportation Warehousing Meet other financial cost of business

PRE-SHIPMENT FINANCE - FORMS

Pre-shipment finance is extended in the following forms : Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)

PACKING CREDIT BASIS

Packing credit is normally granted on secured basis. Sometimes clear advance may also be granted. These advances are clean at their initial stage when goods are not yet acquired. Once the goods are acquired and are in the custody of the exporter, banks usually convert the clean advance into hypothecation or pledge

ELIGIBILIT Y FOR PACKING CREDIT

Available to merchant exporters or export houses, manufacturer exporters, manufacturers of goods supplying to Export Houses An exporter should usually hold an export order or letter of credit in his own name to perform an export contract.
Exporter should not be in the caution list of RBI Running Account Holders are also eligible to this facility

RUNNING ACCOUNT FACILIT Y

The RBI has permitted banks to grant packing credit advances even without production of L/C or firm order/ contract under this scheme Facility subject to the following conditions : The facility may be extended, provided the need for Running Account Facility has been established by the exporters to the satisfaction of the bank The banks may extend this facility only to those exporters whose track record has been established to the satisfaction of the bank.
Contd.

RUNNING ACCOUNT FACILIT Y

CONTD.

L/C or firm order is produced within a reasonable period of time. For commodities under selective credit control, banks should insist on production of L/Cs or firm orders within one month from the date of sanction. Packing credit may also be given under the Red Clause letter of credit.
The credit is given at the instance and responsibility of the foreign bank establishing the L/C. Here, the packing credit advance is made against a simple receipt and is unsecured

APPRAISAL & SANCTION OF LIMITS

Before any sanction is made, banks need to check aspects like product profile, political and economic details about country, status report of the prospective buyer Banks can seek the help of institutions like ECGC or international agencies like Dun and Bradstreet etc. contd

APPRAISAL & SANCTION OF LIMITS

CONTD

Whether the exporter is a regular customer, a bona fide exporter and has a good standing in the market. Whether the exporter has the necessary license and quota permit or not. Whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries (RCC) or not. ECGC classifies the countries into seven categories in the ascending order of risks perceived

THE AMOUNT OF PACKING CREDIT EXTENDED

Basically depends on the export order & the credit rating of the exporter by the bank Generally the amount of packing credit will not exceed FOB value of the export goods or their domestic value whichever is less. The usual banking practice is to extend up to 90% of the FOB value of the order or 75% of the CIF value of the order. Sometimes it can be to the extent of domestic value of the goods even though such value is higher than their FOB value, provided the goods are entitled to duty draw back and the exporter is covered by the Export Production Finance Guarantee of the ECGC.

THE PERIOD OF FUNDING

Banks decide the period for which a packing credit advance may be given Relevant factors are considered so that the period is sufficient to enable the exporter to ship the goods / render the services. Pre-shipment advances should be adjusted by submission of export documents within 270 days & max 360 days from the date of advance

COST OF PRE-SHIPMENT FINANCE

The Base Rate System is applicable from July 1, 2010 and accordingly interest rates applicable for all tenors of rupee export credit advances sanctioned on or after July 01, 2010 are at or above Base Rate. Different banks have fixed different pre -shipment interest rate on export credit on this basis.

LIQUIDATION OF PACKING CREDIT ADVANCE

Packing Credit Advance needs be liquidated out of the export proceeds of the relevant shipment, thereby converting pre-shipment credit into post shipment credit. If exports do not materialize at all, then the entire advance can be recovered and charged on relative packing credit domestic lending rate plus penal rate of interest to be decided by the banks RBI has allowed some flexibility into this regulation under which substitution of commodity or buyer can be allowed by a bank without any reference to RBI.

PRE-SHIPMENT CREDIT FOREIGN CURRENCY (PCFC)

PCFC is available to exporters for domestic and imported inputs of exported goods at LIBOR related rates of interest as decided by RBI. From Nov 11, the rate has been revised to LIBOR plus 350 basis points, till March 31, 2012. The scheme is an additional window for providing pre-shipment credit to Indian exporters at internationally competitive rates of interest.
contd

PRE-SHIPMENT CREDIT FOREIGN CURRENCY (PCFC) CONTD

The exporters/export houses with a good track record can avail of a running account facility with the Bank for PCFC. To qualify for this purpose, the exporters overdue bill should not exceed 5% of the average annual export realization during the preceding three years.

KEY BENEFITS OF PCFC

In case of cancellation of export order, the PCFC can be closed by selling equivalent amount of foreign exchange at TT selling rate prevalent on the date of liquidation. The forward covers can be booked in respect of future PCFC drawings.

TERMS & CONDITIONS - PCFC

The corporations/exporters having firm export orders or confirmed L/C are eligible for PCFC, provided they satisfy other credit norms of the Bank. PCFC is to be repaid with the proceeds of the export bill submitted after shipment. Multi-currency drawings against the same orders are not permitted due to operational inconvenience. contd

TERMS & CONDITIONS PCFC

CONTD

Cross-country drawings are restricted to US dollars. In case, the export order is in a nondesignated currency like Swiss Franc etc. PCFC will be given only in US$. For orders in Euro, Pound Sterling and JPY, PCFC can be availed in the respective currencies or US$ at the choice of exporter.

Post Shipment Financing

NEED FOR POST SHIPMENT FINANCING

Time gap between shipment of goods and collection of export proceeds Time consumed in process of preparing documents, submitting them to the bank and then forwarding of them by the bank Includes a minimum time period of 25 days To bridge this gap commercial banks provide post shipment financing

WHAT IS IT?
A kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds .

THE FEATURES
Post -shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self liquidating. Can be extended up to 100% of the invoice value of goods. Can be of short term or long term, depending on the payment terms offered by the exporter to the overseas importer. Concessional rate of interest is available for a maximum of 180 days from the date of surrender of documents.

T YPES OF POST-SHIPMENT FINANCE

Export Bills negotiated Advance against export bills sent on collection basis. Advance against export on consignment basis Advance against claims of Duty Drawback.

Thank You